For Prada, Surge In China Sales Defies Burberry Blues

Prada Posted 60 Percent Surge In Net Profit In First Half Of 2012

Prada store at Qingdao's Hisense Plaza

Despite Burberry’s highly publicized difficulties this year, the Greater China luxury market remains a much-needed bright spot for brands like Prada and Hermès, as well as major groups like LVMH and PPR. Amid a broader economic slowdown in mainland China, as well as a decline in conspicuous consumption in tier-one cities, some observers have used the examples of slowing growth among apparel-focused brands like Burberry and Hugo Boss over the course of this year as cause for bearishness.

The Asia-Pacific market delivered the highest growth rate for Prada SpA in the first half of the year, accounting for more than a third of the group’s total net revenues. As expected, considering Prada’s expansion in the region over the past half-decade, leading the pack was Greater China, which rose 50.2 percent to €334.6 million (US$432.2 million). Though investors spooked by Burberry’s earnings warning on September 11 caused Prada shares to drop 7.5 percent this month, the newest figures are an indication that we shouldn’t expect a steep drop-off in luxury demand in the Greater China region. Indeed, following the release of today’s figures, Prada shares closed up 1 percent.

Since last year, shares of the Hong Kong-listed company have risen around 70 percent, largely due to skyrocketing demand throughout Asia in general and China in particular. Despite the ongoing public spending crackdown, which some observers expect to crimp luxury sales in mainland China this year, still-growing demand in inland regions — where Beijing’s scrutiny is less intense and newly wealthy shoppers are more likely to buy locally rather than abroad — should largely insulate brands like Prada from any noticeable decrease in sales in top-tier cities like Beijing and Shanghai. Moreover, don’t discount the continued demand of outbound Chinese tourists from top-tier cities. They may not be as active at luxury malls in Beijing as in years past, but that doesn’t mean they’re not shopping on Fifth Avenue or Bond Street.

Within China, considering Prada is not as dependent on the Chinese apparel market as brands like Burberry or Hugo Boss, we expect sales of small Prada and Miu Miu handbags, wallets, leather-goods and accessories in the Greater China region keep the Italian fashion house in an overall stronger position than its apparel-focused competitors. That is, at least until we see a noticeable rebound in conspicuous consumption in top-tier cities.